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Superfunds April 2015
D
uring 2014, the Australian Taxation
Office (ATO) conducted significant
compliance activity, which involved
undertaking a number of risk reviews.
Emerging from this activity was the ATO’s
view that one of its focus areas should
continue to be international issues, in
particular, the tax treatment of investments
in offshore limited partnerships (LPs).
Such investments are likely to have attracted
the ATO’s attention due to the immense growth
in the appetite of super funds for offshore private
equity investments, which are often structured
through LPs.
As a result of the ATO’s compliance activities, a
public consultation process into the tax treatment
of LPs was also launched as a separate initiative.
This process recently concluded with a draft tax
ruling expected to be issued shortly. This article
highlights the complexity of the current tax law as
it applies to LPs and what funds should be doing
now prior to the release of the ruling.
WHAT IS AN LP?
While there will be differences at the margin, the
common element of all LPs is that the liability of
the limited partners is limited. Unlike a general
partnership, where the liability for partnership
obligations is joint and several, and unlimited; in
an LP, liability is limited to the partner’s capital
commitment. In this way, an LP is similar to a
company or fixed trust whereby the liability of
a shareholder or beneficiary is limited to unpaid
share capital or amounts outstanding on a unit.
HOW ARE LPS UTILISED?
Although LPs are not commonly used in Australia,
in an international context, LPs are widely used.
This article focuses on LPs as pooled investment
vehicles for private equity.
In the collective investment vehicle arena,
LPs are often used in a United States (US)
context, whether it be by US fund managers,
managers targeting US investors or for US-based
assets, although clearly LPs are used in other
circumstances.
WHY ARE LPS THE VEHICLE OF CHOICE FOR
MANY FUND MANAGERS?
From a general commercial standpoint, an LP
certainly makes sense as an investment vehicle.
The limited liability of the investor partners who
take no part in the management or operation
of the partnership is something that all prudent
investors would seek. It is particularly relevant to
funds who must comply with the Superannuation
Industry (Supervision) Act 1993. A typical structure
is shown on the right.
Furthermore, for tax purposes in many
jurisdictions, the LP is not taxed as a separate
entity. Rather, the distributions by the LP retain
their character and are taxed as such in the hands
of the limited partners (not unlike an Australian
unit trust).
Private equity
investment
A typical limited partnership structure
Limited
partnership
(Delaware)
Fund